Innovation is the Sincerest Form of Flattery

Innovation is the lifeblood of commerce. It’s in the DNA of most business leaders to become an innovating company. Imitation, its supposed oxymoron, suffers from a pejorative stereotype. Received wisdom holds that it’s innovators that generate monopoly profits that flow until the imitators show up. But what if it were the other way around with the imitators doing well and the innovators choking on their dust?

Oded Shenkar, Ford Motor Company Chair in Global Business Management and professor of management and human resources at the Fisher College of Business at Ohio State University, thinks we have the whole innovation-imitation thing backwards. The Israeli-born academic who holds degrees in East-Asian Studies and sociology from Hebrew University and Columbia, has spent several years researching the relationship between innovation and its idiot-savant cousin, imitation. He cites Harvard’s Ted Levitt that “imitation is not only more abundant than innovation, but actually a much more prevalent road to business growth and profits.” In a new book, “Copycats,” to be published in June of this year by Harvard Business Press, Shenkar sets forth a compelling case that the true spoils go to market imitators not the innovators.

Diners Club may have been the first credit card issuer, but today the market is ruled by Mastercard, Visa and American Express. In 1921, White Castle pioneered the idea of a standardized fast food restaurant chain and after the Second World War Rally’s launched the drive-through concept, but today McDonald’s dominates both. When McDonald’s turned to healthier fare in recent years, Yum Brands replicated the move in its Taco Bell and Pizza Hut chains. Honda and Toyota waited for Ford and GM to be the first followers of Chrysler’s minivan but ultimately pushed them to the side when they introduced their own versions. When RC Cola launched diet cola in the 1960s Coke and Pepsi quickly overtook the innovation and made it their own. Hertz’s Connect car sharing service is uncannily like that of the Zipcar startup that initiated the model. Think of all the YouTube lookalikes that abound on the Internet.

These are more than just anecdotes. Shenkar found that 71 percent of 48 key innovations in business have been successfully imitated and the rate of brand imitation now exceeds 80 percent. Many studies confirm that fast second movers and sometimes even latecomers do very well. A 2004 study covering the 1948 to 2001 period found that innovators captured a mere 2.2 percent of the present value of their innovations. Where did the remainder go? Shenkar believes imitators are the beneficiaries.

“Imitators can tweak the original to fit with shifting consumer tastes,” he writes, “or they can leapfrog into the next technological generation since they do not incur the sunk-investment made by the pioneer incumbent. Samsung, like other South Korean manufacturers, was hopelessly behind in analog technologies when it leapfrogged into the digital age. Having observed market reaction, imitators can better calibrate a product, positioning it in places where returns appear more secure and promising.” In recent weeks both the Wall Street Journal and the Financial Times have run stories reporting how Samsung, once viewed as a me-too analog tech brand, has eclipsed Hewlett-Packard as the world’s largest technology company.

In hindsight imitators capitalize on the shortcomings of early offerings. Since most productivity advances come from subsequent improvements and not the original innovation, imitators, argues Shenkar, are often better positioned to offer customers something that is not always better but often cheaper. In an age of thin margins imitation as a business strategy makes sense, he reckons, because imitators don’t have to retrace all the steps and sink the substantive initial cost bourn by innovators. It may surprise some to learn that in its early days, Disney was more of an imitator than innovator. Walt Disney discerned the limitations of then existing cartoon animation relying as it did on thin or non-existent stories with formulaic characters and weak visuals. His breakthrough was orchestrating the technical and organizational skills of early animation studios to a field that was something of a cottage industry.

Who Moved My Profits?

“If innovation is such a competitive weapon, why doesn’t it translate into profitability?” former Dell CEO Kevin Rollins once asked. Does Shenkar advocate dumping innovation altogether as a business strategy in favor of cloning the innovations of others? Not so fast. As the Dell-HP rivalry attests imitation is, or at least should be part of any overall strategy of innovation. Both are closely intertwined depending on the context. The challenge is getting the context right because it is a moving target. HP, argues, Shenkar is an innovation driven company but one that “turned away from pure innovation to “focused innovation,” with a goal to ‘invent technologies and services that drive value.’ In other words, HP chose to innovate only when imitation could not produce better results. For its part Dell, as one analyst put it, “innovates where creativity will buttress their core advantages, and imitates elsewhere.”

What’s happening in pharma is also instructive. Just days ago Pfizer reported that it is about to cut $3billion from its R&D in the wake of its consolidation of Wyeth Labs. CEO Jeffrey Kindler told the Wall Street Journal that the days of big R&D pushing innovation are over. In recent decades the pharmaceutical industry has been split between innovators and imitators. Generic drugs have captured more than half the U.S. prescription market, fraying the innovators business model and pushing big pharma to embrace imitation as a complimentary strategy. When it created the Established Products Unit to take its share of generics, Pfizer conceded that it would have to do both. Other innovators such as Novartis, Sandoz and Daichi Sankyo, which acquired a controlling interest in Indian generics maker Ranbaxy, have followed suit. Interestingly, Teva Pharmaceuticals, the Israel-based, world leader in generics is expanding into innovative drugs including “biosimilars” which mimic newer biotech drugs.

In fact innovation and imitation are conflated. Procter & Gamble and PepsiCo, for example, see innovation as a differentiator but view imitation as means “not to be disadvantaged.” It’s the “combinative architecture” or the way new elements are assembled that give product offerings their distinctiveness. To be sure imitation is more than just cloning another’s idea. One has to grasp the underlying value proposition if one expects not to crash and burn. As a result, P&G’s goal of having one third of its new product ideas come from outside the company has been exceeded, according to Shenkar, resulting in lower costs and improved time to market. He dubs these folks “imovators,” an inelegant neologism, but one which captures the idea. His book explains why these trends are likely to persist and demonstrates in later chapters a number of case histories, largely in the airline industry but also the cases of Wal-Mart and Apple, how the replication-innovation model works in the real world. Shenkar reckons that imitation receives its second class status in Western civilization as a result of the age of Romanticism with its ethos of “originality, creativity and genius.” In classical times this was not the case. The Roman Empire liberally imitated wherever it could to fuse disparate cultures and institutions under its far-flung umbrella. Later European civilization had no guilt about imitating Chinese porcelain and created wholly new products which we use as tableware today. If nothing else, Shenkar’s book will rehabilitate imitation’s image